RBI unwrapped a box of goodies to power credit and business last Wednesday, even as it delivered a better growth outlook and kept policy rates untouched. RBI also floated a series of measures for better banking competitiveness, credit flow, ease of doing business, foreign exchange management, consumer satisfaction, and internationalization of the rupee.
Details, rationale and impact of Monetary Policy Committee decisions and sweeping banking reforms announced last week.
1. Policy repo rate unchanged at 5.5% and bank rate remains at 5.75%.
2. Real GDP growth for FY26 is now projected at 6.8% – with positive spillovers from monsoon, capex, and consumption.
3. CPI inflation for FY26 is now projected at 2.6% – attributed to GST cuts.
Rationale and Impact
a. Core inflation is at a benign 4.2%, but the RBI has paused rate cuts despite having already reduced rates by 100 bps since February, as transmission is still incomplete. The Governor cited three reasons for holding: pending impact of earlier cuts, GST rationalisation lowering prices, and global uncertainty. Yet, by dropping the word “limited” from policy space, the RBI has quietly signalled that further cuts remain possible if growth pressures persist.
b. Momentum is expected to slow in the second half to 6.2–6.4% as trade headwinds and tariffs weigh on exports. Strong domestic fundamentals—robust services, steady employment, healthy reserves of $700 billion, and a lower CAD of 0.2%—are offset by rupee volatility and rising inflation, leaving the RBI cautious on timing its next move.
c. RBI sees growth as solid but moderating. Our domestic strength clashes against severe external headwinds. This is what the RBI is trying to navigate, but happily, inflation has given them room to move.
While the RBI may not have changed its rate, it announced a flurry of regulatory reforms – 22 separate measures that could fundamentally change how banking works in India. These could, frankly, be a bigger deal than a rate cut. Let’s walk through the biggest ones.
4. Draft guidelines on Expected Credit Loss [ECL] framework being issued for provisioning is proposed to be issued to replace current framework based on incurred loss with an ECL approach.
a. Banks would anticipate loan losses and keep aside funds for them in advance, in a departure from the current practice of making provisions after the default.
b. ECL framework effective from April 2027; glide path up to March 2031.
c. Floated a standardized approach to calculate the amount to be set aside, in line with the Basel framework.
5. The proposed bar (in the draft guidelines of Oct’24) on overlap in the business undertaken by a bank and its group entity (including its NBFC) is being removed.
a. Potential beneficiaries include HDFC Bank, Axis Bank and ICICI Bank, who have non-bank subsidiaries and would have been forced to absorb or get rid of them.
6. Introduction of risk based premium framework for deposit insurance in India.
a. Currently, all banks pay a flat rate of 0.12% per year on their assessable deposits which is 12 paise per Rs 100. This money goes into the Deposit Insurance Fund (DIF), which is used to protect depositors if a bank fails.
b. Since February 2020, each depositor in a bank is insured up to Rs 5 lakh for both principal and interest. If a bank collapses or is merged, depositors are guaranteed repayment up to this limit.
c. Under the new plan, instead of a flat fee, banks would pay a risk-based premium, where safer banks with stronger ratings will pay less, while riskier banks will pay more.
d. This will incentivise sound risk management by banks and reduce premiums to be paid by better rated banks. Run your bank well, and you’ll save significantly on insurance costs. Cut corners, though, and it’ll hit your bottom line.
7. Draft guidelines on Review of Capital Market Exposures Guidelines for banks being issued.
a. Proposed to allow banks to finance acquisitions by Indian companies
i. Previously, banks were barred from direct acquisition financing, pushing corporates to seek funds from NBFCs, AIFs, bonds, or offshore lenders.
ii. According to SBI research, M&A activity in FY24 was valued at more than $120 billion (around Rs 10 lakh crore). Assuming a 40% debt component in such deals, with banks financing about 30% of that, the potential incremental credit demand could be as high as Rs 1.2 lakh crore. This could be a game-changer for M&A activity in the country.
– Proposed to remove the cap on lending against listed debt securities
This could hyper-charge liquidity in the corporate bond market.
– Expanded bank finance for share purchases and lending against REITs / INViTs.
iii. limits on lending against shares enhanced = from ₹20 lakhs to ₹1 crore per person.
iv. IPO financing limits, meanwhile, are going up from ₹10 lakhs to ₹25 lakhs.
These limits hadn’t been revised since 1998, and this move opens up much more credit for market participation. Bank credit to individuals against shares and bonds grew just 0.9% YoY to ₹9,807 crore in August, a 19-month low versus 26.8% growth a year ago, after peaking at ₹10,488 crore in April and falling 10.3% in May. This move is therefore timely.
8. The Guidelines on Enhancing Credit Supply for Large Borrowers is to be withdrawn.
– From 2016, after the NPA crisis, the RBI introduced a framework that progressively restricted lending to large borrowers with credit limits of ₹10,000 crores or more from the entire banking system, The idea was to reduce concentration risk, pushing big corporates to diversify funding through bonds and other sources. That’s now being scrapped. The RBI thinks it already handles concentration risk at the individual bank level, through its Large Exposure Framework. A blanket restriction doesn’t make sense.
9. Lower Risk Weights on MSMEs/home loans and NBFC lending to infra projects
– Proposed lower risk weights on NBFC loans to operational infra projects under public-private partnerships, and a ‘principle-based framework’ for lending to this segment to align with risk characteristics of the projects. This would certainly be a nuanced risk-profile approach and given India’s massive infrastructure needs, this could channel more NBFC funding into roads, ports, power projects.
10. Draft guidelines on operation of Current Accounts (CA), Cash Credit Accounts (CC) and Overdraft Accounts (OD) (“Transaction Accounts”) offered by banks to be issued reviewing the existing norms. Review of instructions on Basic Savings Bank Deposit (BSBD) Account is proposed
– This would deepen inclusion with digitalisation and evolving customer needs.
11. Time period for repatriation by Indian exporters has now been extended from 1 month to 3 months in case of foreign currency accounts maintained in IFSC
12. Outlay of foreign exchange is now permitted up to 6 months from 4 month for merchanting trade transactions.
13. As per the revised guidelines, export/import bills can be reconciled and closed by a bank in EDPMS or IDPMS, based on a declaration by the concerned exporter or importer, as the case may be, that the amount has been realised/paid for value equivalent to Rs. 10 lakh/bill or less including permission to reduce realisable value.
These measures are expected to reduce compliance burden on small value exporters and importers and enhance ease of doing business.
14. Proposed to equip Internal Ombudsman [IO] with compensation powers, aligning the role of IOs more closely with that of RBI Ombudsman.
15. AD banks can now lend in INR to persons resident in Bhutan, Nepal and Sri Lanka including a bank in these areas to facilitate cross border trade transactions.
– It reduces transaction costs. And over time, it could reduce dependence on the Dollar for regional trade.
16. Proposed to include select currencies of India’s major trading partners in the list of reference rates published by Financial Benchmarks India Pvt. Ltd to deepen the onshore forex market.
– The RBI is seeding reference rates to solve the chicken-and-egg problem of thin trading — setting benchmarks first so markets can build around them. While this won’t make the rupee challenge the dollar soon, it could steadily raise its relevance for regional trade settlement.
17. To permit investment in corporate bonds and commercial papers for balances in Special Rupee Vostro Accounts (SRVA) to make rupee as attractive choice of invoicing.
Each policy announcement includes clear reasons such as improving risk sensitivity, facilitating ease of doing business, enhancing market resilience, reducing compliance burden, supporting financial inclusion, or adapting to global best practices and economic changes. These are ambitious bets on the maturity of our banking system. And it reflects confidence in India’s economic trajectory despite the global chaos.